Question

SCENARIO 3.1: Rented DVDs and movies shown in theaters are substitutes. Rented DVDs and plasma TVs are complements. Plasma TVs and movies shown in theaters are normal goods. People watch rented DVDs more often in the winter than in the summer.

Refer to Scenario 3.1. Most plasma TVs sold in the United States are imported from Japan. If the United States government reduces the number of plasma TVs that can be imported into the United States, ceteris paribus, what would happen?

Answer 1

Reducing the import of plasma TVs into the US would likely increase their price, reducing the demand for rented DVDs due to their complementary relationship. Consumers may shift to substitutes like streaming services or visiting movie theaters.

Step-by-step explanation:

If the United States government reduces the number of plasma TVs that can be imported into the United States, ceteris paribus, we can expect a few different outcomes. First, with fewer plasma TVs available, the price of plasma TVs is likely to increase due to the reduced supply. Since rented DVDs and plasma TVs are complements, the demand for rented DVDs would decrease as the price and availability of plasma TVs decrease. Consumers who may have purchased a plasma TV to enjoy their rented DVDs may either postpone their purchase or look for alternatives. Furthermore, as the price of plasma TVs goes up, consumers might shift their entertainment preference to other mediums, like streaming services or going to movie theaters, especially if these are close substitutes to watching rented DVDs on a plasma TV.

Additionally, there might be a ripple effect on the entities involved in the sale of plasma TVs, such as retailers and related service providers, who could see a decrease in business. To account for close substitutes, businesses in the industry may need to adjust their strategy to entice customers to continue purchasing DVDs or seek out alternative products to complement their offerings.

Answer 2

What would happen is Price of TVs goes up and price of rental DVDs goes down. Subsequently, price of movies theaters rises.

Step-by-step explanation:

As there are less import of Plasma TV from Japan, the supply will be lower, while demand remains unchanged. So, price of Plasma TV will go up following is the demand for plasma TV will go down

As Plasma TV and rental DVDs are complementary goods, downward in demand for plasma TV means less demand for rental DVDs while supplies for rental DVD remains the same. Thus, price of rental DVD will go down.

As rental DVD and movies theaters are substitute goods, the demand in rental DVD going down will cause the increase in the demand in movie theaters while supplies for movie theaters stay the same. So, movie theater ticket will go up subsequently.